Thursday, September 5, 2013

The Ringgit: Offshore funds bought the ringgit after the government cut fuel subsidies to reduce the country's fiscal deficit. Malaysian government bond yields slid.

The subsidy cut "will help support the ringgit in so much as it will reduce the fiscal deficit."

The intensity of support will depend on the budget announcement in October 2013. It is a good start as it will help allay concerns until the budget. The ringgit may outperform other Southeast Asian currencies after the 2014 budget plan and especially if the government takes additional steps such as smaller public spending.

In 2012, Malaysia's budget deficit was 4.5 percent of gross domestic product, the second highest in emerging markets after India. Ratings agency Fitch cited the high budget deficit as one factor when it lowered the outlook on Malaysia's A-/A credit ratings to negative from stable in late August 2013.

The commodity-dependent country's fiscal gap slowing exports and high foreign ownership of government bonds has highlighted its vulnerability to market sell-offs amid the Aug 2013 currency rout.

Still, the ringgit is not free from expectations that the Federal Reserve may start reducing bond-buying programme as soon as Sept 2013.

Malaysia Ratings: Fitch Ratings said that Malaysia’s measures to lower fuel prices is too small to alter its negative outlook on Malaysia’s ‘A’- sovereign rating issued in July 2013.

It said only sustained reform implementation, accompanied by structural measures to broaden the revenue base, could make a difference to the sovereign’s credit profile. But an intensification of reforms that can also withstand potential growth headwinds is not on the cards at present (Sept 2013).

Fitch was already factoring in net 1% of GDP reduction in government expenditures in its fiscal projections for the period to 2015, so these fuel price measures do not significantly alter its economic analysis.

The rating on Malaysia could only be reverted to stable if more steps to improve fiscal sustainability and long term macroeconomic stability are taken.

It believes a more calibrated pace of public investment prioritizing non import intensive projects will limit the risk of near term fiscal overruns and lower the likelihood of the current slipping into a deficit.